Investing often comes with different types of fees and costs, which can be confusing. You may wonder what each fee is for, why you’re being charged or how these fees affect your investment returns. To help you make sense of this, here’s a breakdown of some fees and costs you may encounter when investing in common investment types such as managed funds, ETFs or shares.
Management fees and costs
Management fees are common in managed funds and can be incurred in two ways:
- Directly – deducted from your investment balance
- Indirectly – deducted from the unit price which impacts the value of your investment
These fees cover the cost of managing your investment, including:
- Professional investment manager services
- Custodial fees (to secure the fund’s assets)
- Administration costs like record keeping and reporting
These fees are often shown as a percentage of total fund assets. This is called the management expense ratio or MER, which is the proportion of cost applied to 100% of your investment.
For example, if you have an investment balance of $1,000 (100%), you may be charged an MER of 0.40% of your balance, which is a cost of $4 on your $1,000 investment during the year.
Transaction costs
Transaction fees are common in managed funds and are generally charged directly or indirectly from the total fund’s assets. Transaction costs are expenses related to buying and selling investments (transacting). This can include:
- Brokerage fees
- Buy/sell spreads (the difference between purchase and sale price)
- Custodial fees for holding securities
- Exchange fees charged by the securities exchange (eg the ASX)
These fees are expressed as percentage of total fund assets, which is the proportion of the cost applied to 100% of your investment.
For example, if you have an investment balance of $1,000 (100%), you may be charged a transaction cost of 0.05% of your balance, which is a cost of $0.50 on your $1,000 investment during the year.
Brokerage fee or costs
Brokerage fee or cost are an expense related to the services provided by a broker to execute a trade (for example, shares or ETFs) for the investor. This can be charged:
- When you trade as an individual investor you will incur this directly.
- Through your investment manager as part of a managed fund (included as part of transaction costs)
Brokers can be a person or a digital broker (online). In both examples, the brokerage fee is paying for the service provided by the individual who executes the trade, or the cost of the trading platform.
Other fees and costs
The above is not an exhaustive list of all fees, costs and charges associated with all investment types but are the most common. Investments depending on how they are acquired or managed may incur other costs such as commissions, performance fee, contribution fee, establishment and exit fees and may be charged directly or indirectly.
It is always important to understand all the fees and costs that apply to your investment, as this may have an impact on the overall outcome of your investment.
